Economic development is the development of economic wealth of countries or regions

for the well-being of their inhabitants. From a policy perspective, economic development
can be defined as efforts that seek to improve the economic well-being and quality of life
for a community by creating and/or retaining jobs and supporting or growing incomes
and the tax base.

Overview
There are significant differences between economic growth and economic development.
The term "economic growth" refers to the increase (or growth) of a specific measure such
as real national income, gross domestic product, or per capita income. National income or
product is commonly expressed in terms of a measure of the aggregate value-added
output of the domestic economy called gross domestic product (GDP). When the GDP of
a nation rises economists refer to it as economic growth.

The term economic development on the other hand, implies much more. It typically
refers to improvements in a variety of indicators such as literacy rates, life expectancy,
and poverty rates. GDP is a specific measure of economic welfare that does not take into
account important aspects such as leisure time, environmental quality, freedom, or social
justice. Economic growth of any specific measure is not a sufficient definition of
economic development.

Local development
The term "economic development" is often used in a regional sense as well (e.g., a mayor
might say that "we need to promote the economic development of our city"). In this
sense, economic development focuses on the recruitment of business operations to a
region, assisting in the expansion or retention of business operations within a region or
assisting in the start-up of new businesses within a region. (See section 'regional policy'
below.)

In its broadest sense, economic development encompasses three major areas:

1. Policies that governments undertake to meet broad economic objectives such as

price stability, high employment, expanded tax base, and sustainable growth. Such
efforts include monetary and fiscal policies, regulation of financial institutions,
trade, and tax policies.
2. Policies and programs to provide infrastructure and services such as highways,
parks, affordable housing, crime prevention, and K-12 education.
3. Policies and programs explicitly directed at job creation and retention through
specific efforts in business finance, marketing, neighborhood development, small
business development, business retention and expansion, technology transfer and
real estate development. These policies may be directed by central government [3].
This third category is a primary focus of economic development professionals.

Models of economic development

The 3 building blocks of most growth models are: (1) the production function, (2) the
saving function, and (3) the labor supply function (related to population growth).
Together with a saving function, growth rate equals s/β (s is the saving rate, and β is the
capital-output ratio). Assuming that the capital-output ratio is fixed by technology and
does not change in the short run, growth rate is solely determined by the saving rate on
the basis of whatever is saved will be invested.

Harrod-Domar Model

The Harrod-Domar Model delineates a functional economic relationship in which the

growth rate of gross domestic product (g) depends directly on the national saving ratio (s)
and inversely on the national capital/output ratio (k) so that it is written as g = s / k. The
equation takes its name from a synthesis of analyses of growth process by two
economists (Sir Roy Harrod of Britain and Evsey Domar of the USA). The Harrod-
Domar model in the early postwar times was commonly used by developing countries in
economic planning. With a target growth rate, the required saving rate is known.

Exogenous growth model

The exogenous growth model (or neoclassical growth model) of Robert Solow and others
places emphasis on the role of technological change. Unlike the Harrod-Domar model,
the saving rate will only determine the level of income but not the rate of growth. The
sources-of-growth measurement obtained from this model highlights the relative
importance of capital accumulation (as in the Harrod-Domar model) and technological
change (as in the Neoclassical model) in economic growth. The original Solow (1957)
study showed that technological change accounted for almost 90 percent of U.S.
economic growth in the late 19th and early 20th centuries. Empirical studies on
developing countries have shown different results (see Chen, E.K.Y.1979 Hyper-growth
in Asian Economies).

Surplus labor

The Lewis-Ranis-Fei (LRF) Model of Surplus Labor is an economic development model

and not an economic growth model. Economic models such as Big Push, Unbalanced
Growth, Take-off, and so forth, are only partial theories of economic growth that address
specific issues. LRF takes the peculiar economic situation in developing countries into
account: unemployment and underemployment of resources (especially labor) and the
dualistic economic structure (modern vs. traditional sectors). This model is a classical
model because it uses the classical assumption of subsistence wage.

Here it is understood that the development process is triggered by the transfer of surplus
labor in the traditional sector (e.g. agriculture) to the modern sector in which some
significant economic activities have already begun. The modern sector entrepreneurs can
continue to pay the transferred workers a subsistence wage because of the excess supply
of labor from the traditional sector. The profits and hence investment in the modern sector
will continue to rise and fuel further economic growth in the modern sector. This process
will continue until the surplus labor in the traditional sector is used up, a situation in
which the workers in the traditional sector would also be paid in accordance with their
marginal product rather than subsistence wage.